Archives for February 2020

How Does Your Business View Taxes?

February 18, 2020 by Frank

Do You Simply Complain About Taxes, or Do You Have a Strategic Plan to Reduce the Taxes You Pay?

Background

We have yet met a businessperson who does not complain about paying income taxes. The typical small business owner works very long hours only to see the tax authorities walk away with a significant percentage of their earnings.

Despite not liking taxes and wanting to pay less of them, many entrepreneurs lack a tax strategy. The lack of a tax strategic plan can be quite costly.

Why Are Taxes Ignored

We believe that many entrepreneurs focus too much on making sales. From the day that the business begins, the business plan (assuming one exists) is to make as much revenue as possible to pay the expenses of the business. Business owners often ignore tax planning when the business is started because the owner is attempting to conserve cash because of limited financial resources and in the early years is reporting losses or minor profits. The owner very likely is thinking that “I’ll worry about tax planning when the business becomes profitable.” The problem with this approach is that it does not change when the business grows and taxes become a significant outlay.

While revenues from sales are very important, other facets of the business should not be ignored. One facet of the business that is often ignored is engaging in meaningful tax planning. Forget about net profits from a business perspective where net profits are equal to revenues less expenses. Remember that your “true” net profits are revenues less expenses, and one of the most significant expenses you pay, are income taxes. You need to think on a cash flow basis. If you can decrease the taxes you pay, your net cash flows will increase and your business becomes more profitable.

Examples of Meaningful Tax Planning

Work with an experienced tax professional. If you call your tax professional and s/he does not know the answer, do they get back to you after researching the issue? While working with an experienced tax professional may be more expensive, remember that you get what you pay for. If you attempt to cut corners, it usually will cost you more in the long run.

Consider taxes to be a business expense that needs to be periodically reviewed to keep it in check. If you take your tax liability as a percentage of your business revenues, where does it rank? It very likely is one of the largest expenses the business pays, if not the largest.

Periodically request a meeting with your tax advisor to discuss what s/he considers to be meaningful issues your business needs to address.

Work with a tax professional who keeps you abreast of current tax developments. If your tax pro has a blog, read it to keep abreast of important matters.

Read the information your tax pro sends you about important tax issues. After carefully reading those materials, call your tax pro to discuss how they may impact your business. Do not simply ignore those emails or letters thinking that they don’t apply to your business or you will get around to them later (you won’t).

Inquire if your tax entity is tax efficient. Tax laws are constanting changing. Have you reviewed your tax entity (sole proprietorship, partnership, C corporation, S corporation) with your tax advisor? The ideal tax entity when the business was formed may no longer be the ideal entity in today’s tax climate.

Understand how your business entity’s taxes are computed. It is not uncommon for a business owner not to understand how tax flow-through entities work, basis requirements, and what constitutes reasonable compensation.

Call your tax professional to understand how new tax laws impact your business. Tax laws are constantly changing. Perhaps you need to make changes in your business.

Compare the cost of buying new equipment against leading. Leasing conserves the initial cash outlay and may be a consideration if obsolescence is of concern or having the latest technological advances is necessary.

Tax Planning Tip:

Nobody knows your business better than you and nobody should be more concerned about controlling your company’s expenses than you. Taxes are a very significant expense for business owners. Be proactive and call your tax professional today.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Interstate Commerce Speed Trap – Wayfair Supreme Ct. Decision Rears Its Ugly Head

February 11, 2020 by Frank

Bensalem PA Business Owner Receives $1.6 Million Sales Tax Bill from California

Background

It was reported by the Philadelphia Inquirer that Brian Freifelder, who sells clothing, shoes, and groceries on Amazon.com out of a small warehouse in Bensalem, received an assessment notice from California that he could owe as much as $1.6 million for sales tax (just for the first six months of the year). CA says he is liable for the tax that he didn’t collect from consumers who bought his goods through Amazon. His tax attorney called this “an interstate commerce speed trap.”

Freifelder is among what is believed to be hundreds of thousands of third-party merchants on Amazon who were informed by the CA Department of Tax and Fee Administration that they should have been collecting taxes on sales to CA residents as far back as 2012.

When Amazon opened its first warehouse in California in 2013, it escaped the obligation to collect the taxes on sales by third-party merchants on the company’s site, apparently by convincing state officials that it was not the retailer obligated to collect sales tax in those cases — a distinction that has since been undermined by court decisions in South Carolina, Pennsylvania, and elsewhere.

CA’s position is that when Freifelder’s goods showed up at an Amazon warehouse in CA, he had the same obligation to collect sales tax as any retailer with a store there — even if he had no idea where Amazon was storing his goods.

Current Tax Rule

CA and other states now require “marketplace facilitators” to collect sales taxes. PA has issued its rules in Sales and Use Tax Bulletin 2019-01 which became effective for transactions that occurred on or after July 1, 2019. We discussed the revised economic nexus standards for PA and Philadelphia in our August 7, 2019 blog and NJ and PA’s reaction to the Wayfair court case in our December 19, 2018 post.

The Wayfair nexus standard not only affects sales taxes. PA Updated its corporate income tax nexus standard as we discussed on November 7, 2019.

We discussed the 2018 U.S. Supreme Court Wayfair decision on July 24, 2018 which did away with the decades-old standard that states could force retailers to collect sales tax only if they had a physical presence in the state, making marketplace facilitator laws possible.

Tax Planning Tip:

If you are a seller of tangible goods and you have not already contacted your tax professional to evaluate your nexus tax exposure, do so today rather than wait to receive your $1.6 million tax assessment notice.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Tax Treatment for Family Members Working in the Family Business

February 4, 2020 by Frank

It May be Advantageous to Employ Your Spouse, Children, & Parents in Your Family Business, But You Need to Understand the Tax Rules

Both Spouses Carrying on Trade or Business

If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. But, the spouses can elect not to treat the business as a partnership by making a qualified joint venture election.

Qualified Joint Venture Election

Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:

The only members are a married couple who file a joint return,
Both spouses materially participate in the trade or business, and
Both spouses elect not to be treated as a partnership.

Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company (LLC), are eligible for the qualified joint venture election. Find more information on joint ventures in Publication 541, Partnerships.

Spouses electing qualified joint venture status are sole proprietors for federal tax purposes. Each spouse must file a separate Schedule C to report their share of profits and losses. One spouse cannot continue to use the partnership’s Employer Identification Number (EIN) for the qualified joint venture. The EIN must stay with the partnership; it’s used by the partnership for any year in which the business doesn’t meet qualified joint venture requirements.

Employment Taxes

If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship. If the business filed or paid employment taxes for part of the year under the partnership’s EIN, the spouse may be considered the employee’s “successor employer” for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.

One spouse employed by other spouse:

The wages for the services of an individual who works for their spouse are not subject to the Federal Unemployment Tax Act (FUTA). However, such wages are subject to income tax withholding and Social Security and Medicare taxes.

Child employed by parents:

Payments for the services of a child under age 18 aren’t subject to Social Security and Medicare taxes, if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments to a child under age 21 aren’t subject to FUTA. Thus, the payroll tax savings are obvious. However, payments to children are subject to income tax withholding, regardless of the child’s age. Nevertheless, total family-paid income taxes can be reduced by shifting some of the parent’s high-taxed income into the child’s lower income tax bracket. A properly executed W-4 by the child may avoid the income tax withholdings.

If the child makes an IRA contribution on his/her earned wages, additional income taxes could be saved. If the business has a retirement plan for its employees, the parents need to consult with that plan’s advisor.

Keep in mind that the IRS may disallow wages paid to a child. You need to understand the three factors that the courts look at to determine if wages paid to a child are tax deductible. The wages must be reasonable; paid for services actually rendered; and the wages are actually paid (not a journal entry) and best to be deposited into the child’s bank account. In addition to IRS scrutiny of employing children in a business, there are U.S. and state Department of Labor rules to consider.

Other considerations are (1) the impact that those wages may have on the child qualifying for education aid; (2) providing pre-tax plans for your employees; (3) health care premiums paid by the business; (4) by adding a child to the payroll and providing benefits, how are other employees affected?; and (5) if the business has no existing employees, there will be additional costs related to setting up a payroll.

Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare and FUTA taxes if they work for:

A corporation, even if it’s controlled by the child’s parent, or
A partnership, even if the child’s parent is a partner, unless each partner is a parent of the child.

Parent employed by child:

The wages for the services of a parent employed by their child are not subject to FUTA tax. However, such wages are subject to income tax withholding and Social Security and Medicare taxes.

Employees complete Form W-4 so that their employer can withhold the correct federal income tax from their pay. The IRS encourages everyone to use the Tax Withholding Estimator to help them make sure they have the right amount of tax withheld from their paycheck. The estimator automatically links to Form W-4, Employee’s Withholding Allowance Certificate, which they can then fill out and submit to their employer.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.